American Debt: How Dangerous is it?

Past generations of Americans were sticklers for having as little debt as possible.  Many middle Americans remember the horrors during the Depression of losing their farms to banks because they could not pay their mortgages.  Most of those and their children swore never to allow lenders to assume a place in THEIR lives that would allow it to happen again.  But as the decades have passed and two generations since have assumed control of the nation, borrowing and lending ideas have changed.  The U.S. government has gotten borrowing down to a science.  And because of the spiraling debt, the U.S. stands at the brink of total economic devastation.

I could spend time here detailing the amount of debt, how quickly it has risen to its present levels, who is at fault, etc., but none of that will do anything to address the problem.  The real problem is simply that if we Americans do not take control of our existing debt, stop the U.S. debt growth completely, and begin paying down the principle on the debt, our children and grandchildren will see life as we have seen it only in the rearview mirror.  Economic devastation is just around the corner and the government is driving the car with the  blinker on.  Let me explain:

I’ll simplify the issue by comparison that we all can understand.  At your house, if your total gross income is $1000 per month, you set your budget  based on having $1000 a month coming in.  You budget for taxes, housing, food, medical, incidentals, savings, and hope to have a few dollars of that $1000 left at month end.  If you are smart, you sock away a few bucks up front to assure you have some “mad money” left.  At some point you’ll probably buy and finance a car, so of that $1000 you must put aside $100 each month for a car payment.  You would think the federal government would structure its budget using the same or similar budget planning.  But that does not happen.  In fact their plan is as far from yours as Earth is from the Sun.

Here’s how our government handles money:  Let’s assume they have $2000 a month coming into the Treasury in tax revenue.  They budget expenses to expend $2000.  That should be OK because they have exactly enough in revenue to cover the bills.  But they do not stop there.  They decide that California (as example) has a need for $200 a month, but they don’t have that left.  How do they take care of California?  They go to the “money store” — the Federal Reserve — to borrow the money.  The Federal Reserve doesn’t have the money in hand, but they can print a “note” that they can sell for $200 to some investor, broker, or banker.  They sell that note (bond), lend that $200 to the government, then charge the government interest each month.

At the end of the month, the government receives its $2000 in tax revenue and pays all of that out on bills.  But it owes the Federal Reserve $20 for one month’s interest on that bond.  The Federal Reserve owes $5 of that $20 as interest to the investor, broker, or banker it sold the bond to.  The government doesn’t have the $20 it owes in interest to the Federal Reserve of which $5 is owed to the bond purchaser.  What do they do?  The Federal Reserve prints ANOTHER note (bond) that they sell to some investor, broker, or banker for $20 and lends that $20 to the government.  The government pays that $20 right back to the Federal Reserve so it can pay the $5 to the first bond purchaser.  That cycle continues month after month after month.

Do you know what the actual revenue numbers are for the Federal Government?  Total Federal Receipts in 2016:  $3.27 trillion;  Total Federal Outlays in 2016:  $3.85 trillion.  That’s a $587 billion deficit that the government borrowed from the Federal Reserve and added that to the Federal Debt: $19.5 trillion.  Wanna put that in perspective?  If we paid back our debt at the rate of $1 per second, it would take 618,340 YEARS to pay it back.  That is assuming we add not one more nickel to the debt.  And that doesn’t include interest.  Yikes!

There are several real dangers here:  1) The Federal Reserve is NOT owned by the Federal Government.  It is a separate entity.  It does not have money of its own, so when they sell a bond in the marketplace, they are simply selling the commitment of the Federal Government to repay that bond:  face (or principle) amount plus the interest;  2) the investor, broker, or banker who they sell to MUST get paid at least interest or there would be a default.  Then just like during the Great Depression the holder of that note would foreclose and whatever collateral there is promised for the principle and interest for that bond would be seized.  In this case, there is NO collateral, just the “good will and faith” of the Federal Government.  If bond interest/principle default ever happens, the Federal Government would collapse economically overnight;  3)  China is the largest creditor of U.S. debt.  They own trillions of U.S. Treasury bonds.  We must pay interest on those bonds at regular intervals but we do not have the cash from tax income to do so.  What do we do?  We sell more bonds just to pay Chinese bond interest.  When we need more money than the nearly $2 trillion or so that comes into the Treasury in tax revenue, what the Federal Reserve does is literally just like firing up the printing press and printing hundred dollar bills.

And you wondered how the U.S. got to owing $20 trillion.  But…..there’s a much BIGGER problem:  the U.S. has approximately $100 trillion of “unfunded” liabilities.  These are not direct debts like bonds but are commitments the government made for future payments.  They are comprised of Medicare, Medicaid, Federal Union Pension obligations, Federal Employee retirement obligations, Social Security obligations — all purportedly total $100 trillion.  Don’t try to do the math to compute how much of that debt is yours — it will set your hair on fire.

Yes, we as a nation are in economic trouble.

Is there any way out?  It depends on who you listen to.  Obviously our government officials — Democrat, Republican, Independent, or those of any other political ilk — refuse on the most part to even acknowledge we actually have a debt problem.  They are masters at spinning everything that could even be considered a negative.  Their answer is simple:  raise the debt limit.  All that does is signal the Federal Reserve to crank up the presses and issue that worthless paper that runs our debt up even further.  That obviously is not a sustainable answer.  It just kicks the can down the road.  Someone in the future is going to have to pick that can up and do something with it.  The can has gotten so heavy it is now almost too heavy to pick up off the road.

I see only two legitimate solutions:  one is to simply default on the debt — tell all of the Treasury bond holders not only can we not pay the principle of the bonds they hold, we can no longer pay interest.  What would they do,  sue the government?  Obviously that would be a fruitless lawsuit since the reason for default was not having money to pay the debt — there’s no “there” there.  I’m sure the Chinese (who hold the most Treasury bonds) could find some pretty nasty things to do to us internationally if we did default, but short of military action I do not know what they could initiate that would get them major results.  The big downside to default is that most of the balance of those bonds are owned by retirement funds, insurance companies, union pensions, IRA’s, 401K’s, that all represent the bulk of investment dollars for everyday Americans.  If the government defaults, every dime of that money owed on those bonds — principle and interest — would come directly from out of the pockets of Americans.  Primarily because of that, default is NOT a realistic option.  What’s left?

There’s only one other option:  pay the debt.  Wow!  $20 trillion and climbing.  Can it be done?  Obviously it will not be easily done, but it can be done.  And it MUST be done.  What would that process look like?  Honestly, no different from how you would handle it if it happened at your house:  you would find a way to guarantee your income would at least maintain its level while you worked hard to reduce expenses.  Whatever the savings there you would pay on your debt.  That may sound like over simplification, but it is a solution that would work.  But Americans need to be honest about the problem and then force Washington to do something about it.  It will require D.C. to quit painting the rosy pictures to voters and be brutally honest.  Stop the “politi-speak!”  Just tell the truth.  Determine each year the anticipated level of revenue, then determine the cost of bond interest for the year, then compute how much in true spending cuts must be implemented to make the budget at first revenue neutral, then move it into debt repayment mode — including principle AND interest.

Unless these hard decisions are made, implemented, and maintained over time, America is economically doomed.  We will slide into the economic pit alongside third-world countries.  We live in the greatest nation on Earth and the greatest nation in history.  It was founded on Godly fundamental principles.  In many ways we’ve abandoned those principles.  We’ve been forgiven time and time again, given “another chance” over and over.  But God isn’t required to extend those chances to us and I doubt He will.  I’m pretty sure He is tired of the same old abuses by us.  He gave us a way out:  “2 Chronicles 7:14- If My people who are called by My name will humble themselves, and pray and seek My face, and turn from their wicked ways, then I will hear from heaven, and will forgive their sin and heal their land.”

Are we smart enough to do the right things?

MAKE CERTAIN YOU SEE TOMORROW’S STORY THAT IS A FOLLOW-UP TO TODAY’S:  “THE LUNACY OF TAX CUTS.”  I PROMISE IT WILL BLOW YOUR MIND!  SEE HOW TOMORROW.  THANKS FOR READING!


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